The Differences Between a Credit Card and a Debit Card
There are advantages and disadvantages to both credit cards and debit cards. Read on to learn when and how each payment method might best meet your needs.
Sure, cash may be considered king. But, by using cash instead of a credit card or debit card, you can miss out on a variety of perks, benefits, and features.
While credit cards and debit cards both make it easy and convenient to make purchases, each has advantages and disadvantages to help you choose which works best for you.
The main difference between the two is that a debit card allows you to pull funds directly from a bank account to make a purchase while, with a credit card, you are essentially borrowing money from a credit issuer to make a purchase and then paying the issuer back at a later date.
Looking at the pros and cons of each can help you decide whether a credit card or debit card is the route you want to go when making a purchase. But first, it’s important to understand exactly what credit cards and debit cards are.
While there are a variety of credit cards on the market today, the gist is generally the same—a credit card is a small piece of plastic or metal that enables you to purchase goods and services on credit up to your account’s credit limit. If your account is current, you can use a credit card to purchase goods and services on credit up to your account’s limit.
You then pay the card issuer back for your purchases, either by paying the full balance or by making partial payments until the balance is paid in full, plus any interest and fees stipulated in the card agreement.
A standard debit card, on the other hand, is slightly different. When a consumer purchases goods and services with a debit card, the cost of the purchase is pulled directly from a checking account previously set up by the cardholder, rather than on loan from a credit issuer.
Since the payment comes directly from the user’s checking account, there’s no balance to pay off afterward. This means there are no monthly interest charges or fees to worry about unless the user spends more than they have in their account resulting in an overdraft fee.
While both credit and debit cards each offer advantages and disadvantages, a quick list of pros and cons may help you decide which is the correct choice for you when making a purchase.
- Credit history
Responsible credit card use—making on-time payments and keeping your balance low—helps build a positive credit history, raises your credit score, and makes you more attractive to potential creditors. This can lead to more or new credit plus other opportunities like better interest rates on home and auto loans.
- Spending power
Credit cards provide a new avenue of spending power that you may not have with cash or debit cards. A credit card allows you to make purchases up to a credit limit, which may be more than what you’ve got in a checking or savings account. This could come in handy if you need to make a large purchase or have an emergency and need the funds right away.
- Fraud protection
While many credit card issuers offer Zero Fraud Liability as a standard benefit, if your credit card or card information is stolen and used to make unauthorized purchases, under federal law, the most you can be held liable for is $50 if you report your car’s loss after someone uses it.
- Easily replaced if lost or stolen
If you lose cash, it’s more than likely gone for good. On the other hand, if your credit card is lost or stolen, it can be easily replaced by calling your credit issuer.
Credit cards can offer a variety of rewards as added perks for a cardholder making purchases. Depending on the card, users can earn varying amounts of cash back rewards, points, airline miles, discounts, and more.
- Negative impact on credit
While responsible use can help give your credit score a positive boost, the opposite is also true. Failure to make on-time payments of at least the minimum payment due will be reflected on your credit reports and can negatively impact your credit score.
- Interest and fees
Because you’re essentially borrowing the money to make a purchase with a credit card, you must pay back what you spend with interest—unless your card issuer offers a grace period and you pay the balance in full each month. The higher your card’s annual percentage rate (APR) is, the more you will end up spending if you carry a balance from month to month. Credit cards may also come with a variety of fees or penalties that you must pay on top of what you spend, such as annual fees or late payment fees if you fail to make a payment on time.
- Risk of overspending
While having extra spending power can be a major benefit, not having self-control of that spending power can lead to high balances, debt, and a busted budget. It’s important to always remember that you are essentially being loaned the money to make purchases with a credit card and you must pay it back, so spend wisely.
- Stay on budget
Debit cards are limited to only the available funds in a checking account, so they can be a helpful tool to stay on budget and avoid high-interest debt—you can’t spend what you don’t have.
- No interest or late fees
Since you’re not borrowing money to make purchases with a debit card, you don’t have to worry about interest charges or late fees.
- No impact on credit history
Since you’re pulling from funds available in a checking account, your purchases are not being reported to any of the credit bureaus. This means that purchases using a debit card do nothing to help build positive credit history and improve your credit score.
- Fewer rewards
While some debit card issuers may offer rewards programs, most do not offer the types of rewards that a credit card does.
- Less fraud protection
When it comes to a debit card, fraud protection is time-sensitive, meaning what you’re responsible for largely depends on when you report your card lost or stolen. If you inform your card issuer about a lost or stolen debit card before any purchases are made, you’re not liable for any charges you didn’t authorize. If you wait more than two business days to report a lost or stolen card, you could be liable for up to $500. If you wait more than 60 days to report it lost or stolen, you may be responsible for all purchases made.
In the end, there are advantages and disadvantages to both credit cards and debit cards. In fact, it is common to carry both types of cards, plus cash, in one’s wallet to keep financial options open.
Regardless of whether you choose to use a credit card or a debit card, it’s important to always remember to use them responsibly.